Leading analysts in the country feel that the worst is over for the cement industry. "Cement companies have learnt their lessons from past mistakes and they have not undertaken any fresh capacity additions. The focus of the industry seems to be on consolidation," the analysts said.
"The cement industry will perform only when infrastructure projects are undertaken on a large scale," said Ajit Ambani, a broker with the Bombay Stock Exchange. "There is a need to create more demand and it will take atleast six months," he added.
While the cyclical nature of the cement business has taken toll on the performance of key companies in the sector, analysts believe that the industry is poised for a turnaround.
More From This Section
According to a Unit Trust of India Securities Exchange (UTISEL) report, with a strong and continuing demand, cement surpluses will begin to disappear by the middle of next year.
"We expect that cement prices will recover and coupled with low cost pressures, the sector is likely to report good earnings growth," the report says.
The UTI-SEC Cement index, comprising ACC, Gujarat Ambuja, Indian Cements and Madras Cements is down 40 per cent this year.
The performance of cement companies is closely linked to the realisation of margins from existing capacities.
"Capacities have already been built up. With no further capacity additions and sustained demand, margins are likely to be realised. As a result, companies may perform better in the ensuing six months," Vikas Agarwal, cement analyst with Anand Rathi Securities said.
The UTISEL report states that cement prices are the best indicators of the overall demand-supply gap. Cement prices rose sharply in 1994-95 and 1995-96, as strong demand growth outstripped supply. Massive capacity build-up followed to meet the demand and this impacted cement prices and since then prices have remained depressed in most parts of the country.
The report adds that industry prospects are most favourable in the north-east and Madhya Pradesh. Price recovery is expected to be the fastest in these regions.
According to Agarwal, in the short term, only those companies which possess assets that can be hived-off will add to shareholder value. "Diversified groups may be successful in making some money in the light of the consolidation taking place in the market. However, it will be difficult for standalone cement companies to do better for atleast another six months.
They have to wait for a turnaround in the industry," Agarwal said.
Analysts also say that the consolidation phase will trigger more acquisitions by big companies.
"More acquisitions by bigger players, however, does not necessarily mean positive news for shareholders. For example, while India Cements will be able to expand quickly, these acquisitions have resulted in short-term funding pressures for the company. Uncertainties about potential equity dilution may impact the performance of the scrip in the short-term," the report said.
While the UTISEL report states that companies like Gujarat Ambuja and Madras Cements are expect to benefit in the next one year, Agarwal is of the view that Gujarat Ambuja's excess capacities will remain a constraint.